The extended Kalman filter, which linearizes the relationship between security prices and state variables, is widely used in fixed income applications. We investigate if the unscented Kalman filter should be used to capture nonlinearities, and compare the performance of the Kalman filter to that...

When the relationship between security prices and state variables in dynamic term structure models is nonlinear, existing studies usually linearize this relationship because nonlinear fi?ltering is computationally demanding. We conduct an extensive investigation of this linearization and analyze...

We study the ability of three-factor affine term-structure models to extract conditional volatility using interest rate swap yields for 1991-2005 and Treasury yields for 1970-2003. For the Treasury sample, the correlation between model-implied and EGARCH volatility is between 60% and 75%. For...

The extended Kalman filter, which linearizes the relationship between security prices and state variables, is widely used in fixed income applications. We investigate if the unscented Kalman filter should be used to capture nonlinearities, and compare the performance of the Kalman filter to that...

When the relationship between observed fixed-income securities and the latent state variables in dynamic term structure models is nonlinear, existing studies usually linearize this relationship because nonlinear filtering is computationally demanding. We propose the use of the unscented Kalman...

Several papers have questioned the ability of multifactor affine models to extract interest rate volatility from the cross-section of bond prices. These studies find that the conditional volatility implied by these models is very poorly or even negatively correlated with model-free volatility....